Newly proposed rules for foreign entrepreneurs will help some, but not all, found U.S. startups

The U.S. Citizenship and Immigration Services, an office under the Department of Homeland Security, put forward a proposal today that would allow the U.S. Government to offer parole (temporary permission to be in the country) to foreign entrepreneurs starting their businesses in the United States. The proposal specifies that a founder can qualify if they started a company in the U.S. in the last three years and meet investor, founder, and company criteria.

The Secretary of Homeland Security holds the power to grant temporary parole for individuals who provide “significant public benefit.” The extension to entrepreneurs seems natural, though the criteria recommended presents interesting insights into how the government determines the public benefit of any given startup. To qualify, a startup must be:

  • Receiving significant investment of capital (at least $345,000) from certain qualified U.S. investors with established records of successful investments;
  • Receiving significant awards or grants (at least $100,000) from certain federal, state or local government entities; or
  • Partially satisfying one or both of the above criteria in addition to other reliable and compelling evidence of the startup entity’s substantial potential for rapid growth and job creation.

The new International Entrepreneur Rule is a step in the right direction for the Obama administration, but ultimately it will only serve a segment of U.S. entrepreneurs. Ventures that serve a public good but are not primed to scale or generate massive revenue will be overlooked in favor of companies that can offer more typical venture returns.

The proposed rules would allow entrepreneurs to attain parole for two years with the potential for an additional three-year extension. Five years is still brief with respect to the timeline to exit for most ventures. The average IPO-track startup takes seven years to exit, and many take 10 or even 12 years. The extension requirement also puts pressure on founders to have achieved success by the check-in, and presents additional risk to investors that a company could be obliterated from the outside. This still puts startups run by founders granted parole at an inherent disadvantage to startups run by founders with full citizenship.

Additionally, to qualify, entrepreneurs must have at least 15 percent ownership of their respective company. The definition of entrepreneur is kept vague, constituting anyone who “possesses a substantial ownership interest,” “has an active role in operations” and is “well-positioned…to assist the entity with growth.” While there are typically very few employees at any single company that have a 15 percent ownership stake, it could be possible under this rule for multiple people to get temporary parole from the same startup.

Rather than stick to the more commonly used “Accredited Investor” definition put forward by the Securities and Exchange Commission, the Department of Homeland Security is proposing a new “qualification” dependent on “a history of making similar or greater investments on a regular basis over the last 5 years,” and “a demonstration that at least two of the entities receiving such investments have subsequently experienced significant growth in revenue or job creation.”

Besides the fact that under this rule, a Y Combinator-backed startup that receives the standard $120,000 might not qualify, a requirement of having already raised money can force entrepreneurs into an awkward conversation with investors. Early-stage investors at the seed and Series A stage already have a lot of risk to deal with without fear that a founder will be denied parole status. Requiring $345,000 in previous investment, and even using investment as a metric for public good at all, is fraught with concern.

Moreover, the requirement that investors have a track record of success ultimately appears to be an attempt to prevent a lone angel investor from essentially sponsoring parole for cash. Rules designed to prevent fraud, like requiring an investor track record of success and mandating that startups have previously raised funding, will restrict many companies from ever benefiting from the new rule.